Thoughts on the Proposed Change of Currency (or Not) (with apologies to [Sir Walter] Scott) I should begin by putting my cards on the table: I am a Scot who has now lived in the USA for almost half my days, but I retain an active interest in Scottish affairs and visit Edinburgh twice a year; I am also an economist with a particular interest in monetary economics. My prejudice is somewhat unionist, but I can see some force in the desire to cut loose from Tory England. The currency question that has recently emerged in relation to the debate over Scottish independence is very important; it must not be fudged. From my reading of the press today it seems that the options under current consideration are (a) that an independent Scotland not only joins the EU in its own right but also joins the Euro, or (b) that Scotland \retains sterling". George Osborne seems to be suggesting that option (a) would be inevitable, while the SNP (in the form of an unnamed spokesman for John Swinney) seems to be claiming that option (b) is the \crystal clear" outcome of independence. Osborne is apparently trying to scare Scots off independence by implying that \keeping the pound" might not be an option, while noting that the Euro \is not the currency I'd be wanting to join at a time like this." Good news; bad news. The good news is that any country { including an independent Scotland { is perfectly free to adopt the pound sterling as its currency. George Osborne can't interdict that. Numerous countries around the world have at times adopted the US dollar as their currency, without having to obtain the by-your-leave of the US government. The bad news is that if you adopt the money of a foreign country as your national currency, you forego the possibility of exercising monetary policy (that is, deciding on interest rates and on how much money to \print" or supply) on your own account. Indeed, the countries (other than the USA) that have adopted the US dollar have done so precisely because they felt themselves to be (at least temporarily) incompetent to pursue an independent monetary policy { generally because domestic inflationary pressures were so strong that they could 1 be resisted only via dollarization of the economy. OK, but would the pound sterling really be \the money of a foreign country"? Absolutely, yes. Osborne is right this far: you can't have two independent sovereign states sharing the right to \print" a given currency. As the seceding party, a Scotland that retained sterling would truly be at the mercy of the Bank of England. Scotland could acquire pounds only insofar as she could earn them via exports or via foreign investment in Scotland. There could be no Scottish monetary policy. Scottish banks could continue to print \pound notes" with pictures of Robert the Bruce and so on, for domestic circulation, provided they were backed one- for-one by Bank of England notes, and could maybe even negotiate with English banks automatic clearing of such notes spent south of the border, but this would be a strictly cosmetic exercise (and the clearing would be at the gift of the English). There's a lot of angst at present over sovereign debt. It's no coincidence that, despite all the flap, interest rates remain low on the debts of the USA and the UK: these are countries that have their own currencies, and therefore cannot \go bust". So let's come back to the Euro option. There are good and bad reasons to want to steer clear of the Euro at present. The bad reason is to dodge one's share in the support of the least fortunate Eurozone economies. The good reason is that the Euro was arguably a bad idea in the first place, in that it is the common currency of a set of nations that do not have a common fiscal policy. Countries such as Spain, whose fiscal house was well in order before the financial crisis of 2007{2008, are in dire straits today because they are unable to devalue their currencies, not having any independent currency to devalue. The good reason for a newly independent Scotland to be Euro-sceptical is that it could well find itself in the position of Spain at some future date. But this is an equally good reason for a newly independent Scotland to be sterling- sceptical. Why should we expect that monetary policy set in London should be any more suitable for Scotland than policy set by the European Central Bank? 2 At present, of course, we do expect just that, but that's because we're part of one nation, with all that implies. It seems to me that Scottish nationalists are failing at a key hurdle. If they don't like the idea of joining the Euro (or think the idea is a vote-loser), they should be thinking in terms of a new pound scots and an independent Scottish monetary policy. \Keeping sterling" is independence without tears { and without independence! Allin Cottrell Professor of Economics Wake Forest University North Carolina 12 January, 2012 3.